Around €1.7tn of French public debt could eventually be redenominated into francs if the far-right National Front party gets into power, according to party officials, in what would according to ratings agencies amount to the world’s largest ever sovereign default.
While polls suggest the National Front leader Marine Le Pen will come second in the election in May, investors have been pricing in the increased risk of an FN victory as her main rival on the centre-right François Fillon is weakened by a scandal about jobs for his wife and children.
In comments that are likely to amplify fears about the impact of a FN victory on the global financial system, several senior-ranking party members have told the FT that in power the far-right would seek to redenominate around 80 per cent of the France’s €2.1tn public debt — the part that was issued under French law — in a new national currency.
David Rachline, the head of strategy for the National Front, said in an interview that only around 20 per cent of France’s total public debt “falls under international law [and would stay denominated in euros] . . . but for the rest we will have the right to change the currency.”
This would, according to rating agencies, be likely to amount to the largest sovereign default on record, nearly ten times larger than the €200bn Greek debt restructuring in 2012, threatening chaos to the world financial system on top of the collapse of the single currency.
Moritz Kraemer, S&P’s head of sovereign ratings, said in a written statement that this would be a default. “There is no ambiguity here . . . If an issuer does not adhere to the contractual obligations to its creditors, including payment in the currency stipulated, [we] would declare a default.”
Alastair Wilson, head of sovereign ratings at Moody’s, said they would consider any country leaving the euro to be in default if changing the currency of its debt caused investors to lose out financially relative to the original promise. “The test for us is: do we think investors will be able to get back the value they put in, when they expected to get it back,” he said.
There is no ambiguity here . . . If an issuer does not adhere to the contractual obligations to its creditors, including payment in the currency stipulated, [we] would declare a default
Mr Rachline said French debt would be redenominated on a “one franc to one euro” basis. But he added that reintroducing a national currency that could fall in value against the rump euro would lower France’s total debt burden. “[Having our own currency] will allow us to do a competitive devaluation,” he said.
Lawyers contacted by the FT said that the currency redenomination for the bonds governed by French law would be theoretically possible because any nation can change its own laws. This means that bondholders would struggle to pursue France in the courts in the same way they pursued Argentina after its default in 2001.
Matthew Hartley, a debt capital markets partner at Allen & Overy, said: “Because the bonds are governed by French law, they just have to change French law to change the terms of the bonds.”
Mikael Sala, the head of Croissance Bleu Marine, a think-tank supporting the National Front, shrugged off concerns that the redenomination of the currency would be considered a default by the rating agencies. “We will be elected by the French people — it is not our job to please [the rating agency] S&P,” he said. “They do not have much credibility after the financial crisis anyway.”
Even if investors believe Ms Le Pen will probably lose the election, the spread between French 10-year sovereign bonds and the benchmark German Bund — reflecting the increased riskiness of French debt relative to German debt — this week hit a four-year high.
In the run-up to the election, the FN has been arguing it could engineer an orderly exit from the euro. Ms Le Pen has floated the idea of recreating the European Currency Unit, a forerunner of the euro, that could be used by large businesses in parallel to the French franc. This is part of a wider strategy to broaden the appeal of the party.
We will be elected by the French people — it is not our job to please [the rating agency] S&P
But mainstream economists argue that France leaving the euro would cause chaos in Europe. Benoît Cœuré, executive board member at the European Central Bank, this week said that leaving the euro would lead to “impoverishment”, higher interest rates, a heavier debt burden, unemployment and inflation.
The party also says that, following a shift back to the French franc, rules governing the country’s central bank would be changed to allow it to directly finance the French state, for example servicing French welfare payments and government debts.
Leaving the euro is just one pillar of the National Front’s economic strategy, which is focused on making French industry more competitive. They hope that a fall in the value of the new national currency will boost exports.
The second thrust of the FN’s economic policy is to use “intelligent protectionism” to allow them to defend French industries — something that they are currently prevented from doing by EU rules, says the party.
One senior official said it was a return to the politics of postwar head pof state Charles de Gaulle, who kept a tight hand on the French economy. “We are not extreme, we are Gaullists,” said the person, who did not want to be named.
This dirigiste strategy would see them imposing trade barriers on any “unfair competition” from abroad, according to party officials. There would also be a 3 per cent import tax on foreign goods that would be given as tax breaks to the poorest.